China: Donations And Grants In China: Compliance Controls Beyond T&E

While travel and entertainment expenses have presented significant compliance challenges for life sciences companies operating in China, donations and grants can also pose notable compliance risks. China's escalated anti-corruption enforcement in recent years is well-publicized, and regulators have taken interest in grants and donations in the life sciences space. For example, in early 2015, the State Administration of Industry and Commerce ("SAIC"), which enforces commercial bribery regulations, published specific guidance on this issue for the pharmaceutical industry. More recently, the National Health and Family Planning Commission ("NHFPC"), China's regulator for the health care services sector, also enacted specific measures on donations for health care-related organizations. These trends suggest potential scrutiny from enforcement officials towards grants and donations, which may be areas that deserve additional attention from legal and compliance professionals in the life sciences sector.

I. New NHFPC Regulations on Donations

On October 20, 2015, the NHFPC published Measures for Administering the Receipt of Public Welfare Donations by Health and Family Planning Organizations ("New Measures"). Despite being announced in October, the New Measures became effective as of August 26, 2015, and replaced the previous measures enacted in 2007, entitled Interim Measures for the Administration of the Acceptance of Social Donations and Financial Aid by Health care and Health Institutions ("Old Measures").

The New Measures apply to donations received by hospitals, health care institutions and other health care organizations (e.g., medical associations, funds and charities) overseen by the NHFPC, regardless of whether the donations are made by domestic or foreign life sciences companies. The types of donations subject to the New Measures include funds and tangible property, though they are not necessarily exclusive. In particular, the New Measures provide detailed guidance on what donations would be considered appropriate, in part by expressly listing acceptable purposes for donations and prohibited types of donations. Additionally, the New Measures further require that health care institutions establish appropriate controls and procedures in accepting donations.

Although the New Measures technically apply to health and family planning institutions and organizations receiving donations, the detailed guidelines may indirectly impact how life sciences companies provide donations to those organizations and institutions. In turn, life sciences companies, both foreign and domestic, may want to ensure that their internal controls are consistent with the requirements of the New Measures.

Permitted and Prohibited Donations

Unlike the Old Measures, the New Measures expressly enumerate the types of donations that recipients are permitted to accept, which include donations for public health care education, training health care professionals, academic activities and research studies, discounting or waiving costs for medical treatments, and other non-profit programs. At the same time, it expressly prohibits acceptance of certain categories of donations, which include donations related to profit-seeking commercial activities, donations related to the procurement or purchase of products or services, donations where the donor has an interest in the economic benefits, intellectual property rights, research results or industry data of said donation, and donations that do not conform to laws and regulations or involve potential unfair competition and commercial bribery.

Interestingly, the prohibition against commercial bribery appears to create a link to the SAIC and local AICs. As noted above, while the New Measures apply directly to health care-related institutions, its list of expressly permitted and prohibited donations could potentially affect the AIC's interpretation in its commercial bribery enforcement actions.1

Procedural Requirements

The New Measures also set forth certain procedural requirements for donations, many of which are expansions of the Old Measures. For example, donations must still be documented via a written agreement, but the New Measures expressly require that certain information be specified, such as the type, quantity, quality and value of the donated items, the intention and purposes of the donation, restrictions on the management and use of the donated items, etc. The New Measures further provide clear requirements on the method of making donations, including, among other things, that monetary donations be made via bank transfers and that donations in the form of tangible property (e.g., products or equipment) undergo fair market valuation, preferably by a third-party appraiser.

The New Measures also appear to take a further step in requiring transparency. A donation recipient is required to publicize its written policies on accepting donations and disclose donations it has accepted, including the nature of the donated item, the value of such item, and how the item is used, on its website or via mainstream news media. Donation recipients must also report accepted donations in its annual financial statements, along with detailed explanations. Moreover, donation recipients are required to answer public inquiries about donations that they have accepted.

Notable Provisions that Require Further Clarification

The New Measures contain two provisions that are unclear, but may have particular relevance to life sciences companies in China. The first is a requirement that donations for training health care professionals, academic activities or scientific research may not designate the specific recipient or beneficiary. It is unclear, however, whether the scope of this restriction includes company sponsorships of specific health care professions ("HCPs") to attend academic meetings or professional trainings, or sponsorship of a particular principal investigator in conducting certain medical studies or clinical trials. The second requirement is an express prohibition against donations related to "profit-seeking commercial activities," which is not further defined. It is unclear whether this provision could be interpreted broadly to preclude donors from allowing display booths, spaces or other product promotion or marketing presence at an event.

Since its announcement, there has been little public information about enforcement actions pursuant to the New Measures, so it remains to be seen how the NHFPC will interpret these provisions. Nonetheless, some local hospitals and NHFPC-regulated entities have made public announcements stating that they will update their donation policies to comply with the New Measures.2 For the time being, however, life sciences companies should pay close attention to further guidance or enforcement signals from the NHFPC and AIC with respect to donations and grants.

II. Compliance Controls and Monitoring in Relation to Donations and Grants

While the ultimate impact of the New Measures is yet unclear, the underlying compliance risks nonetheless warrant attention. In recent years, pharmaceutical and medical devices companies have made significant efforts to enhance compliance controls and monitoring around travel and entertainment expenses. However, donations and grants are not devoid of FCPA risks and they can present unique compliance challenges. The most significant of those risks stem from involvement of a third party, which means limited control and transparency. In response, similar controls and monitoring for third parties should be undertaken, some of which include:

  • Ensure Clear Policies and Protocols

    While most companies' general anti-corruption and anti-bribery policies include provisions related to donations and grants, special attention to these issues may be warranted. For example, shielding involvement of sales and marketing functions from the company's internal decision-making process, particularly with respect to selecting recipients, can minimize potential quid pro quo considerations that may influence the decision (or the optics thereof). In fact, companies may want to limit the extent to which it designates eventual use of the donated funds or items to particular HCPs who would derive a benefit therefrom. Decisions on donations and grants often involve business considerations, and clear protocols can ensure that those decisions are subject to compliance controls.

  • Perform Due Diligence on the Recipient and Third-Party Intermediaries

    Due diligence should focus on uncovering any governmental relationships and assessing the reputation and appropriateness of the recipient or donee. Bribery risks can arise where the donation may be deemed to indirectly benefit a government official linked to the recipient organization. For example, if due diligence uncovers that the recipient is an organization established by an influential government official whose position or office happens to be relevant to the company's business, the company may wish to balance the potential risks and/or take additional steps to assess the appropriateness of the donation and implement enhanced compliance safeguards.

    Also, recipients, such as hospitals, medical associations and charitable organizations, are not impervious to fraud and misappropriation, as exemplified in accusations against the Red Cross Society of China regarding donations to aid victims of the devastating 2008 Sichuan earthquake. There may be additional reputational risks with providing donations to a recipient that is linked with improprieties and accusations of misconduct.

    Finally, employees might collude with the recipient or third-party intermediaries to engage in misconduct. Best practices would involve performing due diligence on any third-party intermediaries that are involved. Additionally, it may be worthwhile to understand the level of compliance controls employed by the intermediary to assess third-party compliance risks.

  • Ensure Appropriate Terms and Safeguards are Included in Donation, Grant, or Sponsorships Agreements

    The New Measures already require that the written donation agreements set out detailed terms of the donation. Accordingly, compliance terms should also be included. Such terms can set forth appropriate anti-bribery representations and warranties, a covenant from the recipient that the donated funds or items will only be used in accordance with the stipulated purpose and will not be reassigned or transferred, an obligation to provide any required supporting documents and information to show how the funds are actually used, and audit rights (to the extent practicable), among other provisions. Also, it is not uncommon in China for donation or grant recipients to informally solicit suggestions from company employees on the use of funds, including any preferences on selecting HCPs who may benefit from the donation, which can increase bribery risk. Hence, companies may also wish to clearly stipulate the company's detachment and independence from the use of the funds.

  • Post-Donation Monitoring and Verifications

    Similar to travel and entertainment expenses, securing supporting documentation and conducting follow-up verification are important steps towards detecting and deterring misappropriation and fraud in the context of donations and grants. Because third parties are involved, detailed supporting documentation and information tend to be more challenging to obtain. As noted above, companies may wish to establish controls and protocols for follow-up verifications and include contractual obligations for the recipient and/or intermediary to provide necessary supporting documentation and information in the written agreement.

Given the recent regulatory attention to donations and grants, particularly within China's heightened anti-bribery enforcement climate, compliance professionals in the life sciences sector may wish to pay particular attention to how donations and grants are being provided and enhance their compliance programs, where needed, to reduce compliance risks related to donations and grants.

Footnotes

1 As of the time of this article, the AIC has not published any cases instructive to this point and it remains unclear how the New Measures will influence AIC enforcement behavior.

2 On January 10, 2016, Peking University People's Hospital implemented a local policy regarding administering the receipt of non-profit donations, based on the New Measures. Similarly, on February 18, 2016, Chongqing Cancer Hospital implemented a local policy regarding administering the receipt of non-profit donations, based on the New Measures. On May 10, 2016, Tianjin Health and family Planning Commission announced on its website that the local districts/counties and hospitals should follow the New Measures.

3 See here and here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions